Part

COBS Conduct of Business Sourcebook

Chapter

Permitted Links

Printed on: 06/11/2024

Rulebook at: 05/02/2008

COBS 21

Permitted Links

COBS 21.1

Application

  • 01/11/2007

COBS 21.1.1

handbook-rule

The rules in this section apply on an ongoing basis to linked long-term contracts that are effected by:

  1. (1) insurers other than EEA insurers; and
  2. (2) EEA insurers in the United Kingdom.
  • 01/11/2007

COBS 21.1.2

handbook-rule

The rules in this section do not apply to:

  1. (1) contracts that were effected before 1 July 1994, and under which linked benefits were permitted to be determined before that date;
  2. (2) contracts effected by an insurer that are linked long-term contracts only because the policyholder is eligible to participate in any established surplus;
  3. (3) contracts effected by an EEA insurer that are linked long-term contracts only because the policyholder is eligible to participate in an excess of assets representing the whole or a particular part of the long-term insurance fund over the liabilities, or a particular part of the liabilities, of the insurer as determined by the law of the EEA state in which the head office of the insurer is situated;
  4. (4) contracts to manage the investments of pension funds that are not combined with contracts of insurance covering either conservation of capital or payment of a minimum interest, provided always that benefits under those contracts must not be determined wholly or partly by reference to the value of, or income from, or fluctuations in the value of, derivative contracts other than permitted derivatives contracts;
  5. (5) contracts effected before 30 June 1995, to the extent that they provide for benefits to be determined by reference to a collective investment scheme that was a listed security immediately before 1 July 1994; and
  6. (6) contracts linked to permitted units that were effected before 1 February 1992, except to the extent that they relate to acts or omissions on or after that date.
  • 01/11/2007

COBS 21.2

Principles for firms engaged in linked long-term insurance business

  • 01/11/2007

COBS 21.2.1

handbook-rule
A firm must ensure that the values of its permitted links are determined fairly and accurately.
  • 01/11/2007

COBS 21.2.1B

handbook-guidance
  • 01/11/2007

COBS 21.2.2

handbook-rule

A firm must ensure that its linked assets:

  1. (1) are capable of being realised in time for it to meet its obligations to linked policyholders; and
  2. (2) are matched with its linked liabilities as required by the close matching rules.
  • 01/11/2007

COBS 21.2.3

handbook-rule
A firm must ensure that there is no reasonably foreseeable risk that the aggregate value of any of its linked funds will become negative.
  • 01/11/2007

COBS 21.2.4

handbook-rule

A firm must notify its linked policyholders of the risk profile and investment strategy for the linked fund:

  1. (1) at inception, and
  2. (2) before making any material changes.
  • 01/11/2007

COBS 21.2.5

handbook-rule
A firm must ensure that its systems and controls and other resources are appropriate for the risks associated with its linked assets and linked liabilities.
  • 01/11/2007

COBS 21.2.6

handbook-rule
  1. (1) A firm must ensure when selecting linked assets that there is no reasonably foreseeable risk of a conflict of interest with its linked policyholders.
  2. (2) If a conflict does arise, the firm must take reasonable steps to ensure that the interests of the linked policyholders are safeguarded.
  • 01/11/2007

COBS 21.2.7

handbook-rule
In applying the rules in this section, a firm must consider the economic effect of its permitted links and linked assets ahead of their legal form.
  • 01/11/2007

COBS 21.2.8

handbook-rule
A firm must notify the FSA in writing as soon as it becomes aware of any failure to meet the requirements of this section.
  • 01/11/2007

COBS 21.2.9

handbook-guidance
In considering what action to take in response to written notification of a failure to meet the requirements of this section, the FSA will have regard to the extent to which the relevant circumstances are exceptional and temporary and to any other reasons for the failure.
  • 01/11/2007

COBS 21.3

Rules for firms engaged in linked long-term insurance business

  • 01/11/2007

COBS 21.3.1

handbook-rule

An insurer must not contract to provide benefits under linked long-term contracts of insurance that are determined:

  1. (1) wholly or partly, or directly or indirectly, by reference to fluctuations in any index other than an approved index;
  2. (2) wholly or partly by reference to the value of, or the income from, or fluctuations in the value of, property other than any of the following:
    1. (a) approved securities;
    2. (b) listed securities;
    3. (c) permitted unlisted securities;
    4. (d) permitted land and property;
    5. (e) permitted loans;
    6. (f) permitted deposits;
    7. (g) permitted scheme interests;
    8. (h) income from (a) to (g) above;
    9. (i) cash;
    10. (j) permitted units;
    11. (k) permitted stock lending; and
    12. (l) permitted derivatives contracts.
  • 01/11/2007

COBS 21.3.2

handbook-guidance
Nothing in these rules prevents a firm making allowance in the value of any permitted link for any notional tax loss associated with the relevant linked assets for the purposes of fair pricing.
  • 01/11/2007

COBS 21.3.3

handbook-rule
A firm that has entered into a reinsurance contract in respect of its linked long-term insurance business must nevertheless discharge its responsibilities under its linked long-term insurance contracts as if no reinsurance contract had been effected.
  • 01/11/2007

COBS 21.3.4

handbook-guidance

In order to comply with the requirements of COBS 21.3.3 R a firm should:

  1. (1) disclose to policyholders the implications of any credit risk exposure they may face in relation to the solvency of the reinsurer; and
  2. (2) suitably monitor the way the reinsurer manages the business in order to discharge its continuing responsibilities to policyholders.
  • 01/11/2007